Asked by Seema AlHiraki on May 02, 2024
Verified
Which one of the following statements about market and book value is correct?
A) All firms sell at a market-to-book ratio above 1.
B) All firms sell at a market-to-book ratio greater than or equal to 1.
C) All firms sell at a market-to-book ratio below 1.
D) Most firms have a market-to-book ratio above 1, but not all.
Market-to-Book Ratio
A financial ratio that compares a company's market value (price of its stock) to its book value (total assets minus liabilities), used to evaluate whether a stock is under or overvalued.
- Distinguish between market value and book value and their implications for investment.
Verified Answer
DE
Domonique EvansMay 03, 2024
Final Answer :
D
Explanation :
The market-to-book (M/B) ratio compares a firm's market value to its book value. The book value is based on the firm's assets, liabilities, and equity, while the market value is determined by the stock price and the number of outstanding shares. While some firms may have a M/B ratio above 1, indicating that the market value is higher than the book value, not all firms will have a ratio above 1. It is possible for a firm's market value to be lower than its book value, resulting in a M/B ratio of less than 1. Therefore, option D is the correct choice.
Learning Objectives
- Distinguish between market value and book value and their implications for investment.